IMF to Fed: Drop the dots

Howard Schneider

3 Min Read

WASHINGTON (Reuters) - Now that International Monetary Fund head Christine Lagarde has told the Fed to wait to raise interest rates, the IMF staff has followed up with suggestions that the U.S. central bank remake its communications policy and, in a phrase, ditch the dots.

Federal Reserve Chair Janet Yellen (R) and International Monetary Fund Managing Director Christine Lagarde (L) listen to opening remarks before addressing the Institute for New Economic Thinking Conference on Finance and Society at the IMF in Washington May 6, 2015. REUTERS/Kevin Lamarque

The dot plot of interest rate projections issued by Fed officials every three months is confusing, an IMF staff paper has concluded, and should be replaced with a staff forecast of the interest rates needed to achieve the Fed’s goals of full employment and stable inflation.

“It is not straightforward to connect the dots to get a coherent vision of the path ahead,” a team of IMF researchers wrote. The dots “do not provide a clear picture of the Federal Open Market Committee’s majority view.”

The dot plot shows the individual rate projections published anonymously by Fed policymakers.

A more transparent forecast, prepared by staff and perhaps presented at least as the majority view of the Fed’s policy committee, would make the central bank more effective and is “the main next step for modifying the existing framework at the Fed,” the IMF researchers wrote.

In recommending that the Fed drop its dots, the IMF is wading into a long and tortured debate.

The dots have plenty of critics for some of the very reasons the IMF cites. It is hard to tell the majority view. Because the forecasts are anonymous, they leave analysts guessing, for example, which dot belongs to Chair Janet Yellen.

A committee of the Fed is examining those and other communications issues, but has not yet made recommendations.

Some policy makers have also suggested issuance of a staff forecast, similar to what the European Central Bank produces, so that analysts and the public have a clearer view of where the Fed thinks the economy and rates are heading. Members of Congress have made similar suggestions.

But the idea has always foundered at an institution whose various members give different weight to different bits of data, have different views on policy, and have a plethora of staff forecasts and models volleying around the Washington-based board of governors and 12 regional banks.

Rallying around one forecast, the IMF suggested, “would raise the effectiveness of monetary policy.”